CARR - NYSE

Good morning, and welcome to Carrier's Fourth Quarter 2025 Earnings Conference Call. On the call with me today are David Gitlin, Chairman and Chief Executive Officer, and Patrick Goris, Chief Financial Officer. Except where otherwise noted, the company will speak to results from continuing operations excluding restructuring costs and certain significant nonrecurring items. A reconciliation of these and other non-GAAP financial measures can be found in the appendix of the webcast. We also remind listeners that the presentation contains forward-looking statements which are subject to risks and uncertainties. Carrier's SEC filings, including our Form 10-Ks, quarterly reports on Form 10-Q, provide details on important factors that could cause actual results to differ materially. With that, I'd like to turn the call over to Dave.

Thanks, Mike, and good morning, everyone. 2025 was an important year for Carrier. The short cycle residential and light commercial markets softened more than we expected in the second half of the year. We made meaningful progress on our strategic priorities and reached major milestones, including growing our data center business to around $1 billion. Notably, even with 10%, and light commercial down about 20%, total company organic sales were down about 1% as we continued to drive growth in our long cycle and aftermarket businesses. We also reduced channel inventory and lowered overhead, while continuing to invest in technology differentiation, salespeople, and technicians. Those actions position us for stronger growth when our short cycle markets recover. We had our fifth consecutive year of double-digit growth in commercial HVAC, while continuing to gain share and increase margins. Aftermarket was also up double digits for the fifth consecutive year. We offset tariffs with aggressive cost and pricing actions, drove strong material productivity, and took decisive overhead cost actions. And as you'll see in our outlook, the cost actions that we execute into 2025 will deliver over $100 million of savings in 2026. Finally, we distributed $3.7 billion to our shareholders through buybacks and dividends. In terms of capital allocation, we remain focused on investing in the highest return opportunities, maintaining a strong balance sheet, and returning cash to shareholders. We will continue to focus on outsized growth in products, aftermarket, and system offerings, and you can see the progress we're making on all three growth vectors starting with products on slide four. Our data center investments are delivering results with fourth quarter CSA data center orders up more than five times. We are still in the early innings, and our expanded portfolio now addresses essentially all major data center chiller applications. Our share of water-cooled chillers has increased four times since spin, and with our recently introduced Maglev bearing air-cooled chillers, we see meaningful share opportunity there as well. Key differentiators include quick restart, free cooling, and leading at elevated ambient temperatures. We introduced our first CDU for liquid cooling in 2025 and plan additional higher capacity CDUs up to five megawatts in 2026. Over the past couple of years, we have expanded our commercial HVAC engine lab and chiller manufacturing capacity globally and have added hundreds of technicians. These multiyear investments have positioned us to outgrow the commercial HVAC market as reflected in our 2026 outlook, with double-digit revenue growth, including data centers up about 50%. Aftermarket also remains a good news story for us as you can see on slide five. Our playbook works, and we continue to improve upon it. Three years ago, we had 17,000 chillers connected. Today, it is over 70,000. Our attachment rate in CSA grew more than three times last year and is now close to 60%, and our global coverage, that is chillers covered by service agreements, is up to 110,000, including Toshiba. We estimate that 70 to 80% of our high complexity chillers are under service contracts. The area within our aftermarket business where we see the highest growth potential over the next five years is modifications and upgrades. Sales last year were up 20%. With a focused team, investments, and strategy, we see great opportunities in cities globally. In 2026, we are well positioned for double-digit aftermarket growth for our sixth consecutive year. Turning to systems on slide six. HEMS offering in The United States is getting tremendous attention from hyperscalers and utilities, and it is not surprising given the magnitude of the impact that our solution can have on the grid. If our integrated heat pump battery solution were in every home and building that Carrier currently serves, we would free up nearly 15% of grid capacity during peak hours. It also weighs favorably versus alternatives in terms of time to market, cost of implementation, and affordability to the consumer. Our Carrier Energy team's progress in 2025 was significant. Through field trials in Carrier employee homes, we have been demonstrating that we can consistently provide up to four hours of battery-powered heat pump operation during peak hours. We are planning market launch later this year. Likewise, in Europe, we have been working closely with our installers to offer differentiated HEMS solutions. Our SystemsProphy installers, those qualified to sell and install complete solutions, including heat pump, battery, solar PV, domestic hot water, all connected through our digital home energy management system offering, drove their sales up double digits last year. We plan to double our number of qualified Prophy installers in 2026, driving strong growth for them and us. Turning to Slide seven. In our CST business, there is no better example of an end-to-end solution than what we're seeing in our container business. Four years ago, links did not exist. Today, we have over 220,000 paid link subscriptions with over 110,000 on containers, including six of the world's top 10 shipping lines. We also recently invested in NetVaso, which provides enhanced wireless IoT connectivity on cargo ships. By combining advanced AI-driven reefer health algorithms in our LINX applications with enhanced ship connectivity, we enable shipping customers to avoid manual checks on refrigerated units and to predict and avoid failures before they occur. This end-to-end solution is expected to help smooth the container and provide meaningful recurring revenues while delivering differentiated customer value. Let me turn now to discussing some of our shorter businesses starting with CSA resi on Slide eight. Over the long term, residential remains a significant opportunity for Carrier. It is a large replacement-driven market with secular tailwinds in and heat pumps, and our leading brands, channels, and installed base are unmatched and position us for outsized earnings growth as demand normalizes. In this market, we estimate demand in a typical year to be around 9 million units. Between 2020 and 2024, our industry averaged 9.7 million units for a cumulative overage, so to speak, of about three and a half million units. Last year, we estimate our industry delivered about 7.5 million units, so we absorbed about 45% of that overage. We are assuming that we absorb the balance in 2026. Our assumption for the year is essentially no change to the macro conditions that we exited last year with. Little change to mortgage rates, consumer confidence, or new and existing home sales. That would result in total industry units down 10 to 15%. With that industry assumption, our sales would be down high single digits as we benefit from the absence of destocking in 2026 compared to 2025, combined with low single-digit price realization. Turning to CSE Residential on Slide nine. The good news in this market is that the transition from boilers to heat pumps is underway with heat pumps growing double digits as anticipated. The bad news is that the total heating market has been in a cyclical downturn for the past few years. Like The Americas, the industry has been absorbing overage that we saw in the 2022, 2023 time frame. We expect continued softness in total heating units in 2026, resulting in expected flat sales with our growth initiatives being offset by lower industry volumes. When unit volume stabilizes, we are well positioned to drive strong earnings growth given our strategic initiatives and the cost actions that we have taken in this segment. Turning to Slide 10 for what this all means for our full-year guidance. With respect to revenue growth, we expect that about 40% of our portfolio, commercial HVAC and aftermarket, will continue to grow double digits. Expected continued softness in our higher margin short cycle businesses, especially CSA residential and light commercial, is expected to largely offset that growth, taking the total to about 1% organic growth for the company. On the profit side, mix is expected to be a headwind somewhat offset by the cost actions that we took last year. Patrick will take you through the guidance in more detail, but we will continue to focus on controlling the controllables all across all aspects of growth, cost, and productivity. We are the best-positioned company in our industry when our short cycle recover, which they surely will, and we are poised to see outsized gains when they in fact recover. We enter 2026 energized and focused on outgrowing our markets, delivering best-in-class solutions for our customers, and driving productivity as we always do. With that, I will turn it over to Patrick.

Thank you, Dave, and good morning, everyone. I'll provide some color on our results and then move to our 2026 outlook. Please turn to Slide 11. For the quarter, reported sales were $4.8 billion, adjusted operating profit was $455 million, and adjusted EPS was $0.34. As expected, the year-over-year decline in these financial metrics was largely due to much lower volumes in our higher margin CSA residential and light commercial businesses, leading to an overall 9% decline in organic growth partially offset by a 3% tailwind from foreign currency translation. Total company orders were up over 15% in the quarter, driven by strength in CSA Commercial underscoring continued strong demand for our products in this market. Adjusted operating profit was down 33%, mainly reflecting lower organic sales and the unfavorable business mix I just referred to as well as much lower manufacturing output, partially offset by strong productivity. The adjusted EPS decline mainly reflects lower adjusted operating profit, a lower share count, and somewhat higher interest expense and tax rate. We have included the year-over-year adjusted EPS bridge in the appendix on Slide 21. Free cash flow in the fourth quarter of about $900 million reflected a large reduction in inventories and accounts receivable, and full-year free cash flow of about $2.1 billion was in line with expectations. As to full-year results, you can see that our organic sales were down about 1% due to weakness in our shorter cycle businesses, which represent over 50% of our portfolio. Very strong growth in global commercial HVAC, up 14%, helped mitigate the short cycle business' sales decline. Moving on to the segments, starting with CSA on Slide 12. This segment had a very difficult quarter. Organic sales down 17%. Commercial delivered another strong quarter, with sales up 12%, but this was more than offset by lower resi and light commercial sales. Resi sales were down close to 40% with volume down over 40%, offset by regulatory mix and price. Light commercial sales declined 20%. Segment operating margin was just under 9%, a decline of about 10 points versus the prior year, reflecting the impact of lower sales, and significant under absorption in our resi manufacturing facilities, which had less than half the output compared to Q4 of last year. At year-end, field inventories for resi were down roughly 30% year over year in line with our expectations. And we believe that field destocking is now substantially behind us. Similarly, light commercial distributor inventories were down 25% year over year. For the full year, CSA Commercial had another excellent year with sales up over 25% offset by resi down nine and light commercial down twenty percent. Moving to the CSE segment on Slide 13. Organic sales were down 2% with commercial up mid-single digits, offset by mid-single digits declines in resi light commercial. The residential heating market continues to be challenging in this region, particularly in Germany, which is our largest market. Transition to electrification and heat pumps is happening, as reflected by growth in heat pump sales and a decline in boiler sales. Segment operating profit and margin were both up year over year on lower organic sales reflecting the impact of cost actions. Turning to Climate Solutions Asia Pacific, on Slide 14. Strength in India and Australia was more than offset by ongoing weakness in resin light commercial in China, leading to an overall 9% sales decline. Overall sales in China were down about 20%, with Resi and Light commercial down about 30%. Where we intentionally reduced distributor inventory during the quarter while commercial in China was down mid-single digits. Segment operating margin of about 12% was up 100 basis points, primarily driven by strong productivity offset by the impacts of lower sales. Moving to Transportation on Slide 15. This segment had a strong quarter with 10% organic sales growth driven by continued exceptional growth in container. Global truck and trailer was flat in the quarter with growth in North America offset by weakness in Europe and Asia. Segment operating margins, expanded by 30 basis points year over year primarily driven by strong productivity, partially offset by business mix. Turning to Q4 orders. On Slide 16. Total company orders were up 16% for the quarter, with strength driven by commercial HVAC globally which was up over 45% and particularly in CSA, where commercial orders increased 80% reflecting some large data center wins. Applied orders within CSA commercial more than tripled compared to last year. Light commercial orders were up 70% with resi orders about flat. As you can see on the slide, orders were flat to up in every segment. Moving on to Slide 17, and shifting to 2026 organic sales guidance. We expect flat to low mid-single digit organic growth and reported sales of approximately $22 billion. This includes a roughly $350 million year-over-year revenue headwind from the exit of Riello mainly reported in the CSE segment. We announced the sale in December and our guide assumes the transaction closes at the end of the first quarter. Also, Dave mentioned earlier, our outlook reflects continued double-digit growth in commercial and aftermarket globally, offset by continued expected softness in our shorter cycle businesses. In commercial HVAC globally, we expect the first half to be up low to mid-single digits and the second half up mid-teens reflecting comps and customer delivery timing. This back half acceleration reflects conversion of data center wins and delivery of our broader commercial backlog. By segment, we expect CSA and CSE to be up low single digits while CS AME and CST are expected to be about flat. Within CSA residential, we expect a very difficult first half followed by growth in the second half as we benefit from the absence of destocking. CSA Commercial is expected to remain strong. And as I just mentioned, accelerating in the second half as we deliver more of our data center wins. Within CSE, our outlook for a flat RLC business largely reflects expected continued overall heating market weakness. Within CSAME, expected declines in China are offset by growth in the rest of the segment. And in Transportation, declines in container as 2025 was a record year are expected to be offset by modest growth in our global truck and trailer business as well as Sensatec. Moving on to Slide 18, profit and guidance. Profit and cash guidance. Total company adjusted operating profit is expected to be about $3.4 billion. The benefit of modest organic growth and productivity, including prior year overhead cost actions are partially offset by unfavorable business mix given high single-digit declines in CSA resi and light commercial and investments. We expect free cash flow to be approximately $2 billion which will be second half weighted, reflecting our normal seasonality. Finally, we intend to repurchase about $1.5 billion in shares. Moving to Slide 19, We expect adjusted EPS of approximately $2.8 up high single digits versus 2025. Adjusted EPS growth includes about $0.15 from increased operating profit as I just outlined, as well as tailwinds from a lower tax rate and a lower share count which are partially offset by higher net interest expense NCI and the exit of Riello. As usual, additional guide items are in the appendix on Slide 23, and our guide assumes no change to the macro, including the current tariff environment. Finally, let me provide some additional color on the first quarter. As we've communicated previously, CSA resi faces a very tough compare. We anticipate total company Q1 revenues to be about $5 billion with organic revenue down high single digits, including CSA resi down over 20%. We expect Q1 company operating margin to be about 10% largely reflecting the sales and manufacturing volume pressure in our higher margin short cycle businesses. Adjusted EPS is expected to be about $0.50 which includes the benefit of about a 0% effective tax rate due to a discrete tax item in the first quarter. Free cash flow is expected to be a use of a few $100 million in line with our normal operating cadence. While we expect sales and EPS to be pretty well balanced between the first and second half of the year in absolute terms, the year-on-year growth in sales and EPS will obviously be second half weighted. Overall, we will continue to drive operational excellence throughout our businesses as we return to organic growth and margin expansion and remain focused on executing in 2026. With that, I would like to ask the operator to open it up for questions.

We will now begin the question and answer session. If you'd like to ask a question, please press 1 on your telephone keypad. To withdraw your question, please press 1 again. Please pick up your handset when asking a question. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Nigel Coe with Wolfe. Your line is open. Please go ahead.

Thanks. Good morning. Wow. What a year. Thanks for all the details. I did want to maybe, Patrick, dig a little bit deeper into the one Q you know, sort of mix? And can you just maybe talk about you know, the CFA margins? And I it it looks to me if if I just eyeball the numbers, it looks like maybe close to 10% maybe maybe low double-digit margins in CSA. And number one, is that correct? And secondly, just run through some of the drivers for that. So, you know, the fixed cost absorption headwinds that you're facing, any kind of raw material impacts, you know, just, you know, kind of what's driving that margin. And maybe the the the recovery part from there?

Yes. There's a lot there. I'll start with CS expected margins in Q1. And from an overall company, we expect them to be close to about 15% in Q1. Point of view, the way you can think about Q1 is Q1 actually looks very similar to 2025. But with a bit higher sales at about $5 billion. And about a point higher of an operating margin point of view. In Q4, our resi sales were down about 40% and we expect them we expect resi sales in Q1 in The Americas to be down about 20 to 25%. And so that explains a little bit of the uptick in margin in Q1. And then in Q1, because of the 0% effective tax rate, that is about a 10¢ benefit versus so about 15¢ improvement Q4. Five points 5¢ of that is better CSA performance. 10¢ of that is a lower tax rate.

Okay. Just the 10¢ the 10% overall operating margin is what threw me off there. So maybe talk talk about the other segments, other downside drivers in the other segments.

Yes. If I go through the other segments, the Transportation segment is expected to have similar margins to the prior year. About 14%. Asia, had very strong margins in the '25. We think the margins will be similar to what we've seen in the 2025, so about the 10%, 11% range. And Europe, we think that the margins will be similar in Q1 as they were in Q4. So generally, similar margins as to what we've seen in our businesses in the fourth quarter of the year. The Americas a little bit better. It's less of a headwind of resi.

Okay. Thanks, Patrick.

Thank you.

Your next question comes from Julian Mitchell with Barclays. Your line is open. Please go ahead.

Hi, good morning. Maybe just wanted to understand a little bit more that full-year guidance for the CSA residential business. Maybe help us understand what you're seeing in the market on pricing and how you see industry discipline on the price front. And maybe help us clarify kind of how much volume share gain or outperformance you're expecting this year relative to that double-digit I think, sell-in market decline?

Yeah. Julian, let me let me kinda walk you through how we came up with our forecast and guidance for for this year. So we're assuming at the highest level that industry conditions are the same as last year. So no improvement on interest rates, consumer confidence, newer existing home sales. We assume that the second half of 26 industry units are the same as the second half of 2025. So on a two-year stack, that would mean a 30% decline in industry units which is what we assume for the 2026. So all the result there is that in the first half of this year, industry units would be down year over year by twenty year to 25%. And in the second half, industry units would be flat. To the 10 to 15%. Now, Julian, what it means for us is that we believe that the distributor inventory destocking that occurred in the second half of last year is substantially behind us. So, therefore, we think that in the first half of this year, we'll be down 20, 25% consistent with movement. And in the second half, sales will be up our sales will be up 10% given the absence of last year's second half destocking. So a bit complicated, but what that all means is the net result of all of this is that we expect our sales and our our sales and our volume to be down high single digits year over year with our sales including about a low single-digit benefit from pricing.

That's super helpful. Thanks very much. Maybe my question would go on a different topic around CS You know, you had this dynamic in 2025 where decent heat pump growth offset by a boiler price and and sort of mix headwind. Just wondered what you're dialing in for that CSE RLC market for the year ahead. And how you see your own internal dynamics vis a vis heat pump and and boilers playing out?

Well, look. I think the mix up is essentially playing out as we thought. You know? So, the issue is that what we're predicting for this year, for 2026, is that the industry overall in Europe will be down mid to high single digits. Now we guide it to flat because we do get the benefit of mix up, you know, heat pumps up double digits, boilers down low to mid single digits. We'll see aftermarket up double digits, which drops through at a point in a point or two. And then we have our growth initiatives and our revenue synergies, are are frankly playing out well. The big issue that we've been having, frankly, is in Germany where we're, of course, overweighted. So remember, we were thinking that the German market would go from something like 715,000 to 660, then we thought 640,000, and it ended up around 600,000. If you look over historically, the German market is about 800,000. So just like in The US, we do think there will be a reversion to to the mean. We just don't think it happens this year given some of the continued ambiguity and uncertainty around some of the heating laws in Germany.

Great. Thank you.

Thanks, Julian.

Your next question comes from the line of Scott Davis with Melius Research. Your line is open. Please go ahead.

Hey. Good morning, guys. Morning, Scott. Morning. I'm looking at slide eight, and I'm just trying to figure out how far below normal do you think channel inventories are in CSA resi?

Yes, Scott. We as we sit here today, we ended we ended January versus January down about 30 per 32%. So we we did go to great lengths with our channel partners. To end at the field inventory levels that we had we had said. And, you know, that's putting us at, like, twenty eighteen type levels. So the good news is that the field inventory that we targeted to get down we got down, and we've continued to take it down. Here in January.

Okay. Helpful. And moving to to more fun stuff, data center, is obviously usually helpful here. But it no. I don't know how far out you're booking orders, but when you think about the billion-dollar revenue numbers that you put up, 60% up orders kind of implies 1,000,000,006 for '26. Is that somewhere in the ballpark? And perhaps there could be some orders in '27 and and stuff. I'm sure it's not perfect, but I'm just trying to get a sense of that how that orders flows through through revenues and '26.

Yes, Scott. That's about right. I what we're guiding is to 1 and a half billion for this year. So you're in the ballpark. Okay. So we we saw great orders, last year. I mean, phenomenal orders in April been good. So we feel, very well positioned. Now the reality is that we have a lot more in March and April. We would love to see a little bit more pulled in. But right now, that's when the customers that, that we've had great wins with are are are looking for the deliveries. We feel really good about data centers for this year.

Okay. Helpful color. Thanks. Best of luck, guys. Appreciate it.

Thank you, Scott. Yep.

Your next call comes from the line of Joe Ritchie with Goldman Sachs. Your line is open. Please go ahead.

Hey, guys. Good morning.

Hey, Joe. Good morning, Joe.

Hey, Dave. Can we just talk about the, the inventory dynamic just a little further So so clearly, you saw a pretty big reduction in your inventories q on q. I think it was 17%, but the inventory levels were up year over year about 8%. And so is that a function of just building inventories in the parts of your business that are growing? Just give us any more detail on that dynamic.

Hey, Joe. Patrick here. You you may recall that we decided last year to keep our US resi manufacturing facilities running at minimal levels. Because it was more economical than shutting them down for several months and then having a cold start. As a result, is a couple 100,000,000 more inventory on our books at the end of the year than we otherwise would. And our current guide assumes that that gets liquidated through the year. Quarter over quarter, inventories actually dropped.

Got it. Okay. Great. That's that's that's helpful, Patrick. And then and then and then one last question. I know we were kinda being a dead horse here on the on the resi side. But this, like, six and a half million unit industry average, I mean, assuming whatever you wanna assume for new new new housing starts you know, call it somewhere in that million, a million and a half zone. Really kind of res assumes a replacement rate that's, like, north of twenty years for this year. It just seems you know, seems it it seems conservative at first blush. Just any thoughts around you know, if you go back even further, Dave, and you take a look at you know, where the industry was even before that kinda 2020 time frame, like, you know, do you really think that for the year, you're gonna need to flush out this much demand in order to get back to equilibrium? Or trying to be conservative to start the year? Thank you.

You know, Joe, what what we start with are some of those bigger picture, analyses, you know, the average you know, with new home construction of nine, nine point seven and three and a half overage, last year, seven and a half. So we kinda use that for triangulation. Then we go towards what we're seeing with boots on the ground in the marketplace. And we're seeing that what we ended last year, a lot of those macros we did not assume that we'd wake up on January 1 and they'd all be suddenly better and different. So that's why we did the analysis that I kinda took Julian through of what we assumed in the second half. We just assumed for the second half this year because, you know, it is a seasonal business. We can't assume sec something for the second half and apply those volumes to the first half. So we tried to be as pure as we could about the analysis that that we applied, and then we applied that two-year stack to 24. So look, you know, we, we we've guided to down, high single digits for us, the market down 10 to 15. And if things play out exactly as they did in the second half, that's about where we would end up this year. Do we hope it's better? Of course. But that's that's how we're planning.

K. Very helpful. Thank you. Thank you.

Your next question comes from the line of Steve Tusa with JPMorgan Chase and Co. Your line is now open. Please go ahead.

Hey, guys. Good morning.

How are you? Hey, Steve.

Good. Good. Just on on the on the resi side, I I haven't done the math, but what do you what do you think for the, you know, like, for the year now, like, Movement ended at? You know, in in the channel. And what are you assuming? Movement is for next year? Like, help me with what Movement was in Sorry. Like like like like sell out sell out. Sell out. Sorry. Sell out. Yeah. Steve, Steve, Moomit was down about 30% in q, '4. Okay. That's so that's the sellout number. Okay. And then what are you guys assuming for in for in inflation in total company price? And are you how are you marking the commodities? Are you marking them, like, to market today or year end? Or maybe just some color on the inflation side?

Steve, in terms of pricing, Dave mentioned about low single digits, so give or take close to a point. For the total company. In terms of commodities, we block on a a rolling four quarters. And today, as of today, we have about a $60 million headwind related to copper, steel, and aluminum headwind for this for this year, and that is net of our blocking position. That headwind is about equal across the four quarters. And we're about 50 a little over 50% blocked for the full year.

Okay. And the one percent's in resi as well? Is resi a little higher than one?

Low single digits. So in that range. That range.

Great. You know, we That's good. See, we announced a price increase of up to, I think, five or six effective in in March. And we think we'll realize in that low single-digit range.

Great. Thank you.

Thank you.

Your next question comes from the line of Andrew Kaplowitz with Citigroup. Your line is now open. Please go ahead.

Hey. Good morning, everyone. Hi, Andy. Dave, you obviously talked about the 100,000,000 of cost benefits expected in '26 that you actioned in '25. Maybe you could talk about how the benefits are layering in in '26 and if, for instance, CSE residential or CSAME continues to drag, what can you do to protect the margin improvement you have in your guidance?

K. I I'm gonna I wanna make sure I get but I'm gonna walk you through the profit walk '26 versus '25. At the at a high level, we're targeting about a $100 million of incremental operating profit. Volume mix combined is a headwind of about 100,000,000 We talked earlier about price So price is about a point as I combine that with some of the tariffs about a $102,100,000,000 dollars. Productivity, including the cost actions that we have taken, is close to $400 million. You offset that with some of the inflation that I mentioned, annual increase in merit and then investments. And basically, you get to about $100 million increase in operating profit. And then, of course, the segments each have their targets and are working on contingency plans depending on how they perform versus their targets for the year.

It's helpful, Patrick. And maybe you can touch on the guide for CSA, I mean, and the confidence level there for flat 26%. As you know, China RLC revenue was down 30% in Q4 twenty five. You talked about destocking, but it looks like your orders bounced back a little and maybe decompensated. So us more color on what you're seeing there versus the rest of Asia.

You know, for AME for '26, Andy, we we're guiding flat. We expect China to be down about high single digits. We think RLC softness continues. We we think that's down about 20 with the CHVAC business in China being up low single digits. And then the rest of Asia to grow high single digits. We've been doing very well in places like India, and The Middle East. Japan you know, those have been that are watching us for the last two years, Japan actually grew 8%. And frankly, when we bought that Toshiba business, very little growth with margins pretty close to zero. And by the end of this year, our EBITROS should be in the mid-teens. And last year, we grew 8%. So a lot of good work outside of China. Resi in China remains tough. We tried to take some action in the fourth quarter to decrease the amount of inventory in the channel on the residential side. So hopefully, helps us a bit going into next year, but the macros in that resi channel business are still tough.

Appreciate the color.

Thanks, Andy.

Your next question comes from the line of Deane Dray with RBC Capital Markets. Your line is open. Please go ahead.

Hey, David. Good morning, everyone.

Hey.

Dave, if we just step back in terms of all the dynamics in the d destocking, what's your expectation when we come into the typical cooling season? There's still a sense there's pent some pent up demand on the resi side and channel inventory at eight-year lows. Will there be any chance of stock outs? Just it sounds like the the channel in could be some channel inefficiencies. And just kinda how are you prepared for that?

You know, it's one of the the things that we put a lot of on, obviously, forecasting, but also operational agility. So as we get into the season, we have our forecast. You know, we've, assumed, for example, that the first quarter is down in the 20, 25% range, and January was kinda consistent with we with what we thought was gonna happen for the first quarter. As you get into the season, what we we learned from last year is that things can surprise you to the upside or or downside, so we just need to be ready If we get into the season and weather is a very positive factor, we have inventory levels in the channel quite low. Demand starts to pick up. We will we will be positioned, operationally to support that but we think we've tried to plan in a way consistent with what we've been seeing over these last six months.

Alright. That's good to hear. We'll be listening to Al Roker. Yeah. And then Yeah. On the data center side, what are the implications on the recent comments from NVIDIA regarding chiller demand you know, does that change your expectations for the mix between water and air chillers? Does it change any of the configuration economics of the configurations that you're you're modeling in today?

You know, we actually have been very, very fortunate to work very closely with NVIDIA. Frankly, earlier this week, in Vegas, our team was meeting, with NVIDIA. We've been working together on a number of climate optimized reference designs and thinking very closely about the chilling requirements for their future chip, the verruban. What I would say, Dean, at the highest level is that number one, data centers will require a combination of and traditional cooling, and we are confident that NVIDIA agrees with that. If you look at the Blackwell chip and the new 55 degrees C. Both so both need some form of cooling. The Vera Rubin chips will be more efficient and delivers a lot more output but the inlet the input temperature will be about the same. And that power translates directly heat, so both designs require the same amount of heat dissipation. So working closely with NVIDIA and, of course, our hyperscaler and colo customers. We're working on both liquid cooling traditional cooling, the combination through our Quantum Leap offering. And, yes, there's gonna be depending on the customer, some prefer water cooling, if you have access to more water. And then a lot of our recent wins have been on the air-cooled side.

Good to hear. Thank you.

Thank you, Dean.

Your next question comes from the line of Chris Snyder with Morgan Stanley. Your line is open. Please go ahead.

Thank you. I wanted to follow-up on on some of that conversation around speaking to the channel partners. Do you think your channel partners plan for the same level of spring purchasing that they have done in prior years? Or do you think would maybe be a more spread out cadence throughout Q2 and Q3 just given all the volatility that they've had to work through over the last twelve months. Because, you know, while channel inventories, you know, have returned to twenty eighteen levels, per some of the comments, It seems like demand could be tracking below 28. 18 levels. Thank you.

Yeah, Chris. I think that our channel partners are planning the year very consistent with how we're planning the year. So I think after what we all saw in the second half of last year, where frankly, we all got surprised by the magnitude of the decline. I think there's a reticent for a reticence for anyone to get out over their skis. So everyone went to great lengths to get field inventory down. Our our channel partners and us working with them We think that we're balanced, and it'll all now be a function of underlying demand as we get into the season. So I think that clearly, there will be more demand as we get into the season than off season. I think it would be a typical ramp but off a lower base. Thank you. I I appreciate that. And then maybe if I could follow-up on Americas margins. I think Patrick said Q1 of about 15%. So if my math is right, it seems like, you know, you guys are calling for Q2 to Q3 to to to get back to that mid-range. You know? And, obviously, that's a level that you guys have gotten to consistently in the past. But can you just maybe talk about the path to get there? Because it feels like there would still be some level of absorption headwinds you know, volume's still down, and just continued cost inflation in the market. Thank you.

Yes, Chris. So Most of the under absorption year over year this year will be in Q1. For resi. And then sequentially, given the seasonal build, which there will be a seasonal build, that typically happens in the second quarter, late in the first quarter. That is the reason, frankly, why sequentially, we expect margins to improve in that mid-20s range as you mentioned, for CSA. And so it's a combination of less headwind from under absorption, as well as an improvement in sequential sales, which is typical for CSA, even though in absolute terms, organic sales will be lower than the year before.

Thank you.

You're welcome.

Your next question comes from the line of Amit Mehrotra with UBS. Your line is open. Please go ahead.

Thanks. Thanks, operator. Hi, everybody. Dave, I just had a maybe, a philosophical question, and then I wanted to get, a follow-up on incremental margins if I could. So first, folks sometimes never waste a good crisis. And what I mean by that is is that you know, given kind of the environment that you've had to endure, has that offered an opportunity to kinda rethink how the company approaches some of the structural costs? Is there anything that you're doing or wanna do with respect to cost that that that's born from this environment of just hyper cyclicality in the market?

Oh, for sure, Amit. I mean, I love I I love the question because as you just said, you never wanna let a good crisis go to waste. So we certainly, from a cost perspective, we did take out which is very, very difficult, but the right thing to do, we did have to reduce 3,000 heads last year, mostly in the second half of last year. We, we always look at our footprint and had to rationalize our footprint, and there will be more of that as we go forward. Then we look at our overall way of doing business. So we're using AI across our functions to drive more productivity. There's a lot of demands on our people. So it's easy to to to just sort of try to, take out cost. The hard thing is to drive better productivity while taking out cost. So the team's done a great job embracing AI as well to drive more productivity. Then we've looked across everything. We've looked at our forecasting. We've looked at how our whole growth process and how we look at specific campaign by campaign and introducing new products into the marketplace to ensure we win. And we've looked at product platform platforming. So how we can use a back office COE concept for engineering to drive product platforming, So we've made a lot of changes. Look. Our formula works since our spin. Got surprised in the second half of last year by some of the residential downturn. We are not pleased that we missed in the second half. It's not who we are. We plan for that never to happen again. That's not who we are as a company, and we went to great lengths to to learn from that in the second half to do everything in our power to make sure it never happens again.

Great. And and just a a follow-up highly related to that. If I look at the decremental margins, obviously, very, very high in the fourth quarter could have implied quite high in the first quarter as well. You know, the the counterpoint to that is high decrementals sort of also imply high incrementals. And and and I'd just be curious, you know, when this thing turns, and eventually it will turn, how much cost do you have to do you think you have to bring back, and can we be looking at you know, the same type of margin just incrementally as opposed to decrementally, if you can talk about

Yeah, Chris. Maybe a little bit about the Q4 decrementals and if look at the decrementals, it looks like it's a 70% decremental. It's impacted by currency. If you yank out currency, which is about a $150 million in sales with no earnings, our decrementals are 50%. Still really high. But not, of course, close to 70%. The 50% of the represents or reflects sales reductions in resi and light commercial in The US and the under absorption. So as those businesses recover, which as you said at some point, they will recover, we expect to have high incrementals. And you mentioned how much of the cost we've taken out do we have to add back Our current guide includes about a $100 million of incremental investments. Throughout this period, we continue to invest in sales resources and digital capabilities And so I do not expect we have to add a lot of incremental cost that we've taken out this year. As business improves. We will continue to increase our annual investments, but I don't see a a step up after what we've done last year.

Right. Great. Wonderful. Thank you, guys. Good luck. Appreciate it.

Thank you.

Your next question comes from the line of Joe O'Dea with Wells Fargo. Your line is open. Please go ahead.

Hi. Good morning. Thanks for taking my questions. Dave, can you just taking a step back and thinking about the resi cycle and 6,500,000 units and underlying support for nine Just talk about the building blocks to to get back to to nine, the degree to which what we're seeing this year is just replacement that happened maybe sooner than it needed to in that twenty twenty to twenty four period, what you think about in terms of repair versus replace, dragging things out a little bit in '26, But most important, you know, that path to get back to nine.

Yeah, Joe. I think it comes back to the fundamentals. You know? Once you start to see the thirty year start with a five or less, you know, it's been starting in the low sixes. A little bit of tailwind on consumer confidence, a pickup in new home construction, especially on single-family side, and existing home sales A lot of those elements, once you start to see that underlying demand pick back up, we should start to see a a reversion to the mean of that overall 9 million units. I think in terms of repair versus replace, I have no doubt that we saw an uptick in repair last year. We don't think that that's a long-term trend. And I would say for for three reasons, Joe. Number one is that the economics will almost always weigh better in favor of a replacement. A typical repair can cost a thousand dollars. The compressor can be a few k. But it only extends the unit's life by one to three years. So in general, a consumer will be better off with a full replacement Number two, it it was particularly impacted by low sale of existing homes because it hurts you on both ends from the the homeowner that's been waiting to buy a new home is a little bit reluctant to have a full replacement a year two before they sell their home. So they may be waiting and limping along with a repair And once they buy the home, they will often negotiate a replacement of the HVAC product as part of the the full replacement. So that decrease in existing home sales has put probably more pressure on repair versus replace. But as existing home sales starts to pick up, which it eventually will, you'll get back into that replacement cycle. And the third piece I'd mentioned is what you typically see in an industry is with a refrigerant chain, you do refrigerant change, you see more repair versus replace. It takes a while for the channel to get trained on the new refrigerant. Last year, we had a canister shortage with the four fifty four b, which impacted things a bit. And then the old refrigerant eventually becomes more expensive, and it's harder to access. So that that it will lead to more replacement over time. So we need the macros to recover. We don't see repair over replace as a long-term trend. And once that happens, which it eventually will, and we'll be ready operationally to support our customers, the conversion on that will be quite positive.

That that's helpful color. And then, just on CDUs, like, why why do you win on CDUs? You know, we hear kinda talk about a pretty fragmented competitive environment, just the degree to which for you a sale tends to be more of a system sale with a with a chiller and air handling. You know, what that means for kind of margin profile of a CDU and if that's dragging things down at all, just to explain that a little bit.

Yeah. No. No margin, drag at all from CDUs. You know, I'm really proud of the team because we looked on the liquid cooling side, we've looked at both organic and inorganic. And we've opted for a couple of VC investments. You know, we still have a percentage of

Thank you.

Thank you.

Your next question comes from the line of Tommy Moll with Stephens. Your line is open. Please go ahead.

Morning, and thank you for taking my question.

Hey, Tommy. Morning, Tommy.

Wanted to circle back on the comments about MVMT. Two-part question here. Was the down 30 in fourth quarter, is that a a volume number or a revenue number? And then as you think about movement in '26, Dave, if I'm trying to read between the lines here, I think you're essentially saying that channel inventories are pretty balanced currently. And so I think the takeaway there is movement on a track your sales pretty closely through '26, but correct me if that's not right.

It's generally right. What I would say first of all, Tommy, four Q, volume was down a little bit north of 40. Our sales were down in the high thirties because, you know, we got a mid-single digit benefit from, price and mix. The movement if you think about this year, movement will generally track our sales except in the second half, we get a bit of a benefit from the absence of destocking that happened in the second half of last year.

Okay. Thank you for for that verification. The Q4 number we said was volume was units. The Q4 moment is down below 30% is volume. Yep. Okay. And just sticking with Resy for a follow-up here. Obviously, there there have been a lot of headwinds on the volume side. We can all make guesses as to what the drivers are. But one that hasn't been mentioned squarely that I just wanna mention now is Diagon, which obviously lost a lot of market share toward the 2024. You were one of the clear beneficiaries of that. And so granted the industry demand levels are are pretty poor right now, But could your volumes also not just be reflecting the fact that they've been able to take back some of that share and that not that's not a a fault of anyone. That's just a reality that there's a mean reversion in place, and so you're gonna see some of that in volume headwinds at carrier.

We don't we don't think so, Tommy. We we understand what you're saying that we know that there's been some changes in share in the industry over the last five years. If you look at us versus spin, we're probably up a few 100 basis points since we spun. And if you look at our share last year, I would call it flat from a movement perspective, a sellout perspective. So we saw no change in share last year. We understand there's some movement in terms of some folks that may have lost some share and picked it up. From our perspective, up a few 100 bps since we spun, and last year, we held steady at that number. And we expect to hold steady at that number. If not, increase. We have bunch of new products coming out. We have a new fan coil that showed a lot of there was a lot of interest in in Vegas earlier this week. The team's done really well with our channel partners to position us, so we have no intent of losing any share while maintaining price. And, we wanna ensure that we are on that track of of gaining share.

Thank you, Dave. I'll turn it back.

Thanks, Tom.

This concludes our Q&A session. I will now turn the call back to David Gitlin for closing remarks.

Well, listen. Thanks to all of you. We could not be more energized about this year. We did take the opportunity to learn from some things from last year and apply those to position us for a tremendous year in '26. So my thanks to our nearly 50,000 teammates around the world, and thanks to, our investors for your continued confidence.